Q: I have a therapy dog that allows me to deal with psychological issues that make it difficult for me to deal with normal daily activities. I have previously deducted the cost of the dog as a medical expense on schedule A of my tax return. This deduction is spelled out as acceptable in the IRS medical expense publication. At one time, I received a tax benefit for this deduction, but I am now self-employed with a higher income and I am not able to create enough medical expenses to satisfy the IRS’ 10 percent of income test. A friend has suggested that since I now have a self-employed business, I could claim the therapy dog’s expense on schedule C. This would allow me to deduct the cost as a business expense. I need this dog to travel from my home to my office and to handle the day-to-day activities of my business. The dog is even present when I meet with clients, and I could not have these meetings without the dog. Do you think that I can claim a business deduction, rather than a medical expense, for the costs of maintaining my dog?
A: What an interesting question. I have tried to find a situation analogous to yours that has been dealt with in an authoritative fashion but was not able to do so.
The way I would apply the general principles of medical and business deductions, I believe that your expenses are medical rather than business. Let me emphasize this is my opinion, so I will explain the basis of my opinion.
There are cases in which the costs of a dog have been allowed as a business deduction, but they involve a dog that serves as a security animal. In these cases the dog’s only function was to provide security.
There are many examples of medical expenses that serve the purpose of allowing a person to engage in day-to-day activities, including work. These items are deducted as medical expenses without regard to the ancillary benefits that they provide to the person’s ability to work.
The tax law has a principle that deductions are a matter of legislative grace. That is, unless the law itself allows a deduction, it is not permissible to claim the deduction.
Section 213 of the tax law allows a deduction for medical expenses. The description of an allowable medical expense matches your therapy animal expenses. As you note, the IRS agrees with this treatment. The cost of buying, training and maintaining a therapy dog is allowed by this legislative grace.
Section 162 allows deductions for ordinary and necessary expenses of carrying on a trade or business. I do not think that the costs of your dog satisfy this description and that the costs therefore do not meet the legislative grace of Section 162.
That I could not find a case in which a service or therapy dog was allowed as a business expenses does not mean that there is no such authority. But I would be surprised if there was any authority for this position.
Your dog allows you to handle a variety of day-to-day activities, including work. But your description does not suggest that the dog is needed only to allow you to handle the demands of your work.
For this reason, I do not think the costs meet the requirements for a business deduction.
Q: I have a rental property under contract at $240,000. After paying off the loan and the closing costs, I should net $176,000. I want to avoid tax by buying replacement property in a like-kind exchange. Do I need to invest $240,000 or just the $176,000 I get out of the sale to avoid all gain?
A: You need to invest $240,000 minus the closing costs to avoid any gain. The debt payoff will not reduce the amount that you need to reinvest.
Ignoring any reduction in the required reinvestment for closing costs, you can either invest $240,000 of cash, $176,000 of cash and $64,000 of debt, or anything in between that uses at least the $176,000 of cash.
Your share of the closing cost on the replacement property will be counted against the $240,000.
Jim Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at email@example.com.